GST’s Impact on Small Cars After July 1

By Registrationwala

9th June 2017

GST is all set to be rolled out from July. Undoubtedly, the biggest economic reform of independent India will impact all strata. While middle class is expected to be the biggest beneficiary out of it, there are certain commodities that will definitely get a little expensive. Small cars are all slated to be a little more expensive than what they are right now as they will be put in the category that is in economics parlance termed the sinful category. Hence the move to have GST for the automobile section has not gone down well with some sections.

Not less than 10 central and state taxes will be unified as one. All the Goods and Services will have to be categorized into either of the four tax slabs – 5, 12, 18 and 28 percent – which is closest to the current incidence of taxation. The existing four-tier excise duty classification is based on two aspects — the length of the vehicle and the engine capacity (different for petrol and diesel cars). The GST regime is supposed to have only three layers of cess for cars, while having the uniform peak duty of 28 per cent.

Under the current form of taxation, small cars – cars which are less than four metres in length - are taxed at 12.5 percent that is the central excise duty. Furthermore, another 14.5-15 percent VAT is levied by states, eventually taking the combined taxes to 27-27.5 percent. Hence the final category for these small cars will be the sinful category which is the highest of all at 28 percent. Since there will be a minor increase from 27.5 percent to 28 percent, the prices will go up but not by a big margin as is feared in some quarters.

While smalls cars will be costlier than before it is the price of the mid-sized cars that will be impacted more. Those cars, which are up to 1500ccand the body length is less than 4 metres, are currently levied at 24 percent central excise duty by the central government and then further 14.5 percent VAT by the State governments, taking full tax to 38.5 percent. Hence this category of vehicles will be taxed at 28 percent and a state compensation cess to take the total incidence at least somewhat closer to the current rate.

The provision of levy of cess on top of the peak of the tax rate has been introduced in GST to compensate for the losses that the state might have to incur after the law is implemented. Among some of the products that might be brought under are automobiles as well. However, this has been made clear by the government that the provision will be only for the first five years. The provision will be reviewed after five years to see as to there is further need of the provision or the economy has stabilized enough to accommodate the set percentage of taxing.

Here is the catch that car companies can manipulate to suit their narrative. The official voices say that this ‘compensatory’ cess can go as high as 15 percent and the cess will be added to the peak rate of the tax to finalize the tax incidence of taxation that is closest to the current levels.

For SUVs or cars that are more than 15000 in cc are currently taxed at 41.5 percent to 44.5 percent. Out of this 27-30 percent goes to the pocket of the central government while the remaining 14.5 percent accounts as VAT for states.

The official statement has confirmed that the SUVs will be taxed at 28 percent and then there will be a maximum cess of 15 percent. Thus the final taxation would be market at 43 percent. Hence the final tax of these vehicles will be lesser than what the current incidence is. Although, the decrease in the tax rate will be marginal, the prices will see a dip as the actual cost of the vehicles are higher than the usual. Sedans in the domestic market are taxed at 44.5 while the SUVs are taxed at 52 percent. So in the big car markets, there are both gainers and losers. For sedans will be little cheaper than what they are the moment, it is the price in the SUV market that will soar high. Planning to by an SUV? Do it before July arrives.

As far as the luxury cars are considered, there will be no change in that market. Luxury cars will continue with the previous prices as these have been kept away from the general type of standard goods and services. Hence only the small and medium car industries will go through the GST transformation.

In the 21st century, India has emerged as one of the bigger markets of small cars globally. In fact, the tax structure that was liberal in comparison to some of the other developing countries of the world was a major propelling force.

The price of the smaller cars would have definitely come down by 12-13 percent if the government accepted the standard GST rate of 17-18 percent. But that is again bordering on Utopia. It was something that never had many takers in the policy making wheel of the government. The move to implement GST will certainly benefit the big car making companies that were already considering raising the tax value to 40 percent. If the maximum cess is taking into consideration, these companies are in for a big haul.

Also the prices of spare parts of these vehicles like batteries et al will come down as the spare parts are these days taxed at 28 percent. However, once the GST comes into play, these products will be taxed at 17-18 percent.

There is still come ambiguity over the size of the cars and their classification. It is not yet decided as to which car will fall in to which category to enjoy the two slabs of cess. Still there is a hunch that there will be a minor decline to the availability of cess.